Playing the Long Game

Early adoption of mobile payments has been slow, but industry innovations will speed momentum for consumer and merchant acceptance.

By Ed McKinley

The future may belong to mobile payments, but it is taking some time for the new era to fully arrive. Although the number of people using their smartphones to pay at the point of sale and the amount they’re spending are both growing prodigiously, mobile payments still account for only a tiny fraction of all purchases. “In the U.S., it’s way less than 1 percent of transactions, but it’s growing nicely,” says Thad Peterson, an Aite Group senior analyst.

That word “nicely” fits the stats, according to Bryan Yeager, an analyst covering digital trends for the research company eMarketer. “You have double-digit growth year-over-year in terms of the number of users and triple-digit growth in terms of transaction value,” he says.

Last year, the number of Americans making mobile payments grew 41.4 percent from the previous year to 23.2 million, Yeager notes. The number of mobile payments users is expected to climb by 61.8 percent this year to a total of 37.5 million, he explains. The value of their mobile purchases reached $8.71 billion last year, up 136.8 percent from 2014, and consumers are projected to make mobile purchases of $27.05 billion this year, an increase of 210.7 percent over last year, according to eMarketer research.

Growth in dollars is outstripping increases in the number of users because consumers are making larger purchases—perhaps buying a chair instead of just a cup of coffee—as they gain confidence in the security of mobile payments and more merchants accept the transactions, Yeager says. Spend per user is expected to total $721.47 this year, up from $375.82 a year ago.

That wildfire growth, however, needs perspective. Yeager explains that the 37.5 million consumers making mobile payments this year are just 9.6 percent of the nation’s mobile phone users. Even by 2019, only about three in 10 smartphone users will be making purchases with their devices for a total of $210.45 billion. “In the context of total credit card transactions, which are in the trillions of dollars in the U.S., we’re just barely scratching the surface,” he maintains. “It’s a very long game in terms of ubiquity.”

Still, mobile will eventually have its day, predicts Jeff Crawford, a senior manager at First Annapolis Consulting Inc. “I don’t think there will be a single catalyst that makes everybody use it,” Crawford says. He likens the spread of mobile to the gradual adoption of EMV, where chip cards are becoming widespread, but merchant acceptance is lagging behind.

Meanwhile, awareness of specific electronic wallets is growing as names like Apple Pay, Android Pay, and Samsung Pay penetrate the collective consciousness, notes Melissa Fox, also a senior manager at First Annapolis. “Even if they haven’t used them, they are aware of them,” she says of respondents to the third edition of the firm’s “Study of Mobile Banking & Payments,” which tracks consumer adoption and use of mobile banking and payments products. As that awareness grows, the future will belong to mobile payments, concludes James Anderson, an executive vice president in the MasterCard Digital Payments and Labs group. “The interactivity and the connectivity associated with smart devices is going to be something that is compelling to merchants to figure out and solve.”

Catalysts of Change

One factor that could hasten adoption of mobile payments comes as a byproduct of the EMV transition, analysts agree. Consumers and merchants often consider dipping a chip card more time-consuming than swiping a card with a magnetic strip, so they might become willing to move on to the next step of paying with a mobile device. EMV also may speed up the arrival of mobile payments because many, if not most, EMV-capable payments terminals also accept the near field communications (NFC) signals that can enable waving or tapping a digital device to pay.

Growth will continue as consumers replace aging handsets that aren’t capable of making mobile payments, Yeager notes. Nearly all of the smartphones sold or leased these days have the ability to make payments, but Peterson notes that the current generation of smartphones is the first to be NFC-ready. As consumers become more comfortable using the capabilities of their phones, Crawford predicts the likelihood increases that they will make payments using them. Meanwhile, the percentage of mobile phone users who have smartphones will rise from the current level of about 70 percent, he says.

In addition, the spread of wearable computing devices, such as smartwatches, smartrings, fitness trackers, digital eyeglasses, and even articles of clothing with microchips, seems likely to increase mobile payments. Commuter transit companies implementing mobile payments could, according to Yeager, familiarize the urban public with mobile payments and, thus, “be a really big catalyst” to adoption. Such a system could increase the speed with which passengers get through turnstiles and help to build momentum for mobile payments.

As so often happens with new technology, big merchants will integrate innovation sooner than small- and medium-sized merchants, says Crawford. Large retailers are attracted to mobile payments as a way of tying together loyalty programs, he maintains. Starbucks, for example, has excelled at making sure its mobile payments transaction experience pleases consumers, and the company already receives more than 20 percent of its revenue through mobile payments, according to published reports.

Because most stores don’t accept mobile payments, consumers are discouraged from trying to make them, Fox says. Conversely, merchants shy away from accepting mobile transactions because customers aren’t demanding them. Samsung plans to address the acceptance issue by introducing a phone that focuses a magnetic ray in a terminals card swiping mechanism to vibrate the head as though a card had been swiped, says Tim Sloane, vice president, payments innovation, and the director of the Emerging Technologies Advisory Service at the Mercator Advisory Group.

Security concerns also continue to hold back mobile payments adoption. “We see it in survey after survey,” Yeager says. Consumers often balk at loading their cards onto a phone and transmitting the information to a terminal. “It’s a new behavior that people have to learn,” he continues. “I equate it to where we were 10 or 12 years ago with e-commerce and people had to have a lot of trust to put their information online.” Since then, retailers have built their security reputations on the internet despite some notable data breaches.

Tokens of Security

In general, consumers are becoming more confident in the security of mobile payments, says Nachiketa Mitra, vice president, payments, for Cognizant, a consulting company. Mitra cites an Experian survey that found 61 percent of respondents believe “biometric identification is either just as secure as or more secure than the current systems of passwords.”

It’s only right that consumers should be feeling better about the security of mobile payments, says Sloane. The thumbprint or password can stay in the phone, he says. To obtain that information a hacker would have to enter each individual device, a time-consuming endeavor that’s not worthwhile unless the owner of the phone is a multimillionaire or a corporate treasurer.

Peterson maintains that cards are safeguarded even more effectively by keeping a digitized card in the phone instead of storing it in the cloud or entering the information into merchants’ terminals. “With Apple Pay or Android Pay or Samsung Pay, you’re loading a tokenized version of that card in your wallet,” he says. “It’s probably the safest payment method there is,” he says. “You combine the token, the biometric, and the device. There’s no way for anybody to hack the device to get the card number.”

Even with greater security, privacy issues can hold back mobile payments, says Fox. Some consumers simply don’t want to advertise their whereabouts on the internet or share information on what they’re purchasing, she says, characterizing those concerns as a lack of trust.

Even battery life becomes an issue when consumers begin to rely upon their smartphones for payments. “The physical issue of helping people make payments when their phones run out of juice has to be addressed,” says Yeager. He cites one example of the possible consequences: U.K. transit riders have had to pay the highest exit fare when their phones ran out of charge and thus could not document the length of the ride.

Technicalities aside, mobile payments will spread if consumers become enamored of them. “Merchants want to accept the way customers want to pay,” notes Fox. “As goes consumer adoption, so goes merchant adoption.”

Observers contend, however, that mobile payments constitute a new form factor for paying with established payment methods. Mobile represents another way of transacting with a card or directly through a bank account or prepaid account. That means mobile payments don’t necessarily threaten the established order of the payments industry, such as ISOs’ merchant-services relationships, they say.

Infrastructure Issues

Meanwhile, transactions continue to travel over the infrastructure created by the banks and card brands or through the automated check handling (ACH) system. Instead of thinking about the “card,” MasterCard executives now think about the “account,” which clients can use to make mobile payments, Anderson says.

Still, schemes to accept mobile payments outside the established infrastructure have gotten attention, even if they do not seem to be making inroads with consumers. Some of the nation’s largest retailers have worked together to establish their own system called the Merchant Customer Exchange (MCX) with an ACH-based mobile wallet platform known as CurrentC. To establish MCX, some big merchants vowed they wouldn’t accept NFC mobile payments, but they later relented. CurrentC itself, however, never saw the full light of day. One rollout postponement in 2015 and another in May of this year accompanied by a 30-person layoff and a refocus by MCX toward “partnerships with financial institutions,” according to TechCrunch. In June, Consumerist reported MCX informed CurrentC beta test users in Columbus, Ohio, that accounts would be deleted at the end of the month.

It’s not easy to compete with card brands, Anderson maintains, citing MasterCard’s 40 million merchant locations and more than 2 billion cards. Plus, consumers want to continue the relationships they have with issuers like Bank of America, he suggests.

Some banks have plunged into mobile payments, using digital and traditional media to associate their names with Apple. Banks seek that connection with Apple after struggling since the Great Recession that began in 2007 to restore their brand equity and trust among consumers, Yeager says. A few banks are offering their own mobile wallets, he says, including Wells Fargo, Capital One, and Chase Payments.

MasterCard introduced MasterPass in July to help banks and credit unions enter the realm of mobile payments. A long list of major banks and some smaller banks have accepted the card network’s offer to employ MasterPass, which works in all digital use cases, according to Anderson. “Our strategy is the banks being successful on their own terms with their own brands empowered by MasterPass,” he says.

Visa describes its entry, the Visa Digital Commerce App, as a product that enables issuers to put their own brand on a mobile app. Issuers can use it to offer real-time account balances, card controls, alerts intended to head off fraud, and token services, according to a Visa website.

The outbreak of bank-based mobile wallets should find a market, surveys indicate. Research shows 45 percent of consumers would prefer to get their mobile wallets from banks, says Fox. That’s true even when consumers are using mobile wallets from another source, she indicates, and it’s true among consumers who have digital wallets and those who do not have one but are interested in getting one. Consumers already trust their banks, and they would like mobile payments to integrate with their mobile banking. “Banks and issuers can play a bigger role than they are today,” she concludes.

Retailers offering their own mobile wallets include giants such as Walmart and CVS. But having so many mobile wallet options can confuse consumers, Yeager says. Some users would prefer a universal wallet that’s accepted everywhere, a model Samsung approaches with its Loop functionality, Yeager says. Some retailers, however, have enough customers to justify a wallet.

Walmart, for example, has tens of millions of customers already using its app for coupons and promotions, he notes. They can integrate payments with that and then use the incentives to steer customers toward the payment option, he says. In other examples, Walgreens and Kohl’s are integrating their loyalty programs with Apple Pay, and Jamba Juice is working with Android and a number of others, he says.

Companies that are using the established card networks’ infrastructure are making the right decision, Peterson says. “One of the smartest things Apple did was to embrace the payments system,” he opines. “They made everybody a partner, and that was brilliant because it took a huge challenge off the table.” Perhaps they’re bringing the future of mobile payments just a little bit closer. TT

Ed McKinley is a contributing writer to Transaction Trends. Reach him at [email protected].